The Fed’s QE4 Program Is Really Working

The economy is still growing, despite higher taxes and major spending cuts.

Job seekers wait in line to meet with employers at the 25th Annual CUNY big Apple Job and Internship Fair at the Jacob Javits Convention Center on April 26, 2013, in New York City.

Photo by Spencer Platt/Getty Images

The Bureau of Labor Statistics reported Friday that the American economy added 175,000 jobs in May, a clear sign the economic recovery remains on track. And yet the relief that greeted this number is also a sign that America has entered a prolonged era of diminished expectations: We no longer expect the kind of robust, rapid recovery that brings the country back to full employment. The Federal Reserve seems to be succeeding in keeping the economy growing despite sharp fiscal tightening. At the same time, nothing in the numbers justifies the recent rumors that the central bank will start “tapering” its stimulus efforts. The labor market remains pathetically weak, and policymakers should be doing everything in their power to boost it.

For a sign of how narrow our horizons have become, look north to Canada. Its government statisticians also issued a jobs report on Friday. Our neighbors added 95,000 jobs in May.

That’s fewer than 175,000, obviously, but Canada is a much smaller country. With only 10 percent of America’s population, it added more than half the number of jobs we did. The positive news, not just from the May report but from the jobs reports all year, is that job growth has been much steadier than many expected. The 2013 economy has been hammered by a set of adverse changes in federal fiscal policy that many worried would send the economy into a tailspin.

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That started with the expiration of the payroll tax holiday in January, which reduced middle-class wage earners’ take-home pay by about 2 percentage points. By pretty much any economic theory under the sun, that should hurt economic growth. On top of that, we’ve also seen a significant increase in taxes on rich people and investors as part of the resolution of the fiscal cliff. Liberals argue that such measures have little growth impact, but conservatives warned they’d be job killers. Conversely, we’ve also had substantial cuts in federal discretionary spending as part of sequestration and through previous budget agreements, both of which liberals thought would crimp the economy. And there really are signs that sequestration is taking a bite out of employment. The federal government shed more than 9,000 non-postal workers in May following a slightly smaller decline in April. Those declines both directly pushed down overall employment and probably cost some private-sector jobs as well through reduced spending.

But all things considered, the U.S. economy’s steady addition of about 178,000 jobs per month in 2013 despite fiscal drag is a testament to the success of the Fed’s QE4 policy adopted last December. Fed governors committed to open-ended bond purchases to the tune of $85 billion a month for an extended period of time and said interest rates wouldn’t be raised unless inflation reached 2.5 percent. It’d be a stretch to say the Fed succeeded in fixing the economy, but it has given the economy enough strength to withstand blows that both the left and right predicted would kill it.

The bad news is that the past couple of months have witnessed a steady drumbeat of speculation that the Fed might consider “tapering” (i.e., reducing) its QE3 asset purchases in light of economic growth.

That would be perverse. A MarketWatch poll conducted earlier this week had 53 percent of investors saying they were hoping for a worse-than-expected jobs report because economic weakness would prevent tapering. That’s produced some righteous moral outrage, but the fact that investors are thinking along these lines indicates that the Fed still has to get more forceful. Ben Bernanke needs to clarify that the Fed will tighten the money supply only if there is excessive inflation.

And there’s still no sign of inflation. “Core” price increases are at their lowest level in 50 years. The jobs report further confirmed that the economy contains plenty of slack. Despite the added jobs, the unemployment rate actually ticked up slightly because the improving situation is pulling new people into the labor market. Wages were flat, because with so many unemployed, it’s hard for workers to bargain for higher pay. Rather than talking about doing less quantitative easing in light of the relatively healthy labor market, the Fed should be talking about doing more quantitative easing in light of the restrained inflation situation. The goal should be to create as many jobs as we can, not just enough to get by.